CACHE LOGISTICS TRUST
K2LU.SI
Cache Logistics Trust - Tough times ahead
- DPU came in lower y-o-y both for 4Q and FY basis.
- Acquisitions in Australia lengthen weighted average land lease expiry to 43.6 years.
- Downgrade to Reduce on sluggish leasing market and overhang of supply.
Asset values of the Singapore portfolio did not hold up.
- The Singapore portfolio of Properties (excluding DSC ARC) was revalued downwards y-o-y by S$45.9mn. The Manager attributed this to more conservative valuation assumptions adopted, in view of the lower economic growth rate and lower achievable rentals.
- The relatively shorter land lease expiry also played a contributing factor in the downward revaluation (low 30’s years vs. peer average above 40 years).
- Total fair value change in the portfolio at the end of the year was negative S$64.7mn, effectively erasing out the full year net profit of S$53.0mn and ending with an after tax return of negative S$12.3mn.
- NAV per unit at the end of FY15 dropped to 88.0 cents vs. 98.1 cents at the end of FY14.
Renewals and new leasing has been sluggish.
- Leases that expired in 4Q15, albeit a few small pockets of space, 2% of Gross Rental Income (GRI), were not renewed by the tenants.
- The Master lease for Air Market Logistics Centre (expiring on 18 August 2016) was renewed with single digit negative reversion. DSC ARC is 82% occupied, with DHL fully occupying Block 1 (78% of NLA) and Block 2 has been slow to fill up, now at 19% occupancy. Difficulty in filling Block 2 arises from the short tenure of 2 years, after which the area has to be made available to DHL.
12% of leases by GRI expiring in 2016.
- This comes from Schenker Megahub (31 August 2016) and Hi-Speed Logistics Centre (15 October 2016).
- The Manager guided that both underlying occupancies were almost full, and was actively engaging the master lessees as well the underlying tenants to secure renewals.
- Taking the cue from the renewal of Air Market Logistics Centre, the two properties are likely to be renewed with negative reversions. Further downward pressure on Net property income is to be expected, if the two Properties are converted to multi-tenancies instead.
S$4.62mn of proceeds remain from the divestment of Kim Heng Warehouse.
- Kim Heng Warehouse was divested in June 2015 for S$9.7mn, realising a gain of S$0.7mn. S$1.45mn, S$1.51mn and S$2.12mn were included as partial capital distribution in 2Q, 3Q and 4Q FY15, respectively, totalling S$5.08mn in FY15.
- We have assumed the remaining S$4.62mn will be completely distributed within 1H16.
How do we view this?
Tough times ahead.
- While pre-commitment levels of Singapore new warehouse space in 2015 and 2016 look to range c.72% to 78%, this also creates an equivalent potential shadow space in the market.
- We believe that weak economic activity will continue to weigh against industrialists' sentiments, with rents facing downward pressure, as the Manager endeavours to maintain occupancy.
- Expect overhang of supply of warehouse space going into 2017, stemming from the overflow of unabsorbed space in 2015 and 2016.
Further unit holder dilution is a matter of time.
- Aggregate gearing of the REIT is at 39.8%, leaving little room for manoeuvre.
- We estimate a low debt headroom of c.S$118mn, assuming 45% target gearing. Thus making any large scale acquisition purely on debt virtually out of the question.
- The Manager was sceptical of another round of equity fund raising (EFR) in the near future given that a placement was carried out just recently in 4Q15 and the current weakness in the share price makes it inhibitive to tap the equity market again.
- Solutions that the Manager is considering is Perpetual Securities or taking a smaller interest in big projects to open up opportunities of scaling up into the project later in the future.
Investment Actions
- We are negative on the warehouse segment owing from the oversupply, and are unconvinced that demand can absorb the overhang of supply created.
- The value of the Singapore portfolio has not been able to hold up and it is evident that the discount to NAV does not offer downside protection.
- We roll forward our forecasts and raise our cost of equity to 7.8% (derived from CAPM), downgrading Cache to "Reduce" rating, with lower DDM-backed valuation of S$0.82. (previously S$0.94)
Richard Leow CFTe
Phillip Securities
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http://www.poems.com.sg/
2016-01-26
Phillip Securities
SGX Stock
Analyst Report
0.82
Down
0.94
